Luke Skywalker, Supply-Chain Hero

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Hit hard by the economic downturn, participants from all parts of Corporate America — manufacturers, distributors, retailers, and customers — have been humbled. That has fostered a wave of sympathy, information sharing, and pricing cooperation among participants not so eager to play nice before, according to Reuben Slone, executive vice president, supply chain, at office-supply retailer OfficeMax.

Slone himself was forcefully made aware of the benefits of collaboration almost eight years ago. At the time he was vice president, global supply chain, at Whirlpool. One of his goals was to cut the appliance maker’s logistics costs, and to that end Slone and his colleagues used an online auctioning tool to secure the absolutely lowest bids for the transportation of goods from Columbus, Ohio, to the West Coast. But the quest for rock-bottom prices backfired. “In June 2002 nobody came to haul our appliances on those particular lanes,” recalls Slone. “Theoretically we saved a lot of money. Unfortunately, I almost got fired.”

Slone, a co-author of The New Supply Chain Agenda, a recently published book that argues for more-collaborative forecasting, planning, and inventory replenishment, says the Whirlpool experience taught him a “super lesson.” In a recent interview with CFO, he compared customers who ruthlessly push suppliers to charge less to the villainous Darth Vader of Star Wars, and predicted that those companies will eventually be eclipsed by customers who take a more enlightened view of pricing — the Luke Skywalkers of the supply chain. An edited version of the interview follows.

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I would argue that the recession has accelerated innovation. It has been the single greatest opportunity in my career to drive change in how one operates cross-functionally. Everyone feels the pain, so the degree of collaboration that we have with our suppliers, for example, has never been better. If we don’t violate their confidentiality — many of our suppliers support our competitors as well as us — and we ask the right questions, we can get a tremendous amount of broad market information from them. I’m not sure that in the past you would have been able to take that relationship where we’ve taken it today.

How has the downturn affected your relationships with customers?

There have been two kinds of customers in the recession. There have been those that behaved in an enlightened way. They have not, for example, taken advantage of us when commodities — whether it was transportation, or steel, or iron — were priced at near zero. The enlightened customers were not using that as leverage to lock us into an unsustainable price position. They were saying, “Let’s take a long-term view, and we’ll work through this together.” I would call those the Luke Skywalker-type of customers.

Then there have been the Darth Vaders, who basically said: “We’re going to grind you down and take advantage of this economic dislocation to lock you into ridiculously low rates.” And I think what we’re going to see is that the Luke Skywalkers will significantly distance themselves from the Darth Vaders over the next 10 years. The Vaders are going to have the lowest rates on paper — and they’re not going to get what they need. They won’t get steel; they won’t get their stuff hauled.

What metrics do you look at to forecast demand for your products and services at OfficeMax?

The whole [aim] of forecasting is to predict human behavior. So you’ve got what I call rocket scientists using regression analysis. Their job is to say, given what happened in the past, here’s what we think will happen in the future. The most critical metric is point-of-sale history. Then you start layering in internal causal events — price changes or anything to do with promotions, for example — that can push that metric up or down.

Then we try to capture as much correlation as we can between things we’re doing and the broader economic environment in order to predict sales. If we were running a promotion that happened to be around the Super Bowl, for instance, it could be overshadowed. Our events often happen on the weekends, and if someone’s home watching the Super Bowl, then they probably won’t be out shopping. We haven’t done promotions during the Super Bowl for that very reason.

Among the other factors affecting our demand forecast is the competitive entry or exit at the store level: when a Best Buy or a Staples opens, how will that change buying patterns around our store? We also look at the effects of weather and actually have a “hurricane algorithm.” This helps us predict how many bottles of water, flashlights, batteries, and other things people will buy from our stores in advance of or after a storm. Seasonality is another factor: there’s very different buying behavior at our stores in January, February, and March than there is in the fall.

What role should the CFO play in forecasting?

One of the CFO’s key responsibilities is communicating with the investment community. The CFO has the difficult job of providing either specific or general guidance on how the company will perform next quarter or next year. In essence, share price represents what people feel about the company and its prospects for the future. So there can’t be anything more important than the CFO overseeing the forecasting process for the company. If it doesn’t work, how can the CFO provide guidance with any kind of credibility to the investment community?